Fill reserve before repaying schools

/ 14 March 2012 / jennifer

Star Tribune Editorial, March 14, 2012 –

Everyone benefits from healthy state reserves.

Budget reserves don’t get a lot of love at the State Capitol.

Throngs don’t congregate to shout “Don’t raid our reserves!” Lobbyists don’t line the corridors plotting strategies to plump up reserves or shield them from attack.

It’s a pity that they don’t. Adequate reserves are the taxpayers’ insurance policy.

They guard against disruptive cuts and/or tax increases when an ill-timed financial calamity strikes. They also keep borrowing costs low for both state and local governments.

SIZE MATTERS

“MMB recommends a budget reserve of 4.2 percent of the preceding biennium’s general fund expenditures and transfers, or $1.3 billion, is required to adequately manage cyclical risk in the current biennium. … Minnesota’s formal budget reserve [$653 million] is well below what rating agencies believe to be consistent with sound financial practice.”

– Jim Schowalter, Minnesota Management and Budget commissioner, in a statutorily required report to the Legislature, Jan. 13, 2012

By comparison, K-12 schools top Capitol popularity charts. When money is tight, legislators who gladly cut spending for just about everything else hesitate when it comes to schools.

A one-time delay in school payments — in effect, an IOU — has proven to be as far as they will go. As a result, the state’s Great Recession IOU total to school districts now stands at $2.4 billion.

That’s the backdrop for a politically clever but fiscally imprudent move engineered by House Republicans.

Just a week and a day after word came that reserves were back at their statutory target of $1 billion ($350 million in a cash flow account; $653 million in a rainy-day fund), House GOP leaders announced their intention to draw down $430 million to hasten payment of the IOU to schools.

That would not give schools more money than they’re budgeting now. But it would diminish schools’ need for short-term borrowing to prop up their budgets until delayed state payments arrive — even as it increases chances that the state would have to borrow on a short-term basis to cover its own midyear cash needs.

The GOP plan does not change the state law that sets the reserve target at $1 billion. It does not alter a 2004 statute that requires that, after a fiscal crisis, the cash flow and reserve funds be refilled before any debts to schools are settled. It retains a requirement that state budget officials recommend the optimal reserve level.

The House Republican plan simply ignores all those things. They evidently believe that Minnesotans won’t notice or, if they do, will agree that — just this time — repaying schools beats maintaining healthy reserves.

We don’t agree — in part because we don’t believe that the reserve drawdown would occur “just this time.” The GOP proposal is likely to set a de facto new normal for reserves, one a good deal lower than needed to regain the top Wall Street credit rating that Minnesota lost last year.

The higher interest rates that a credit downgrade bring don’t affect state government alone. The interest rates charged every local government in the state — including school districts — are pegged to the state’s credit-worthiness.

The House GOP proposal would leave the reserves at about $570 million. They correctly note that the reserve has been below that level for the past four years, under governors and Legislatures of both parties.

But those were years of extraordinary distress for state government, made worse because reserves were too small at the start.

The experience of the past four years underscores the point made by the bipartisan State Budget Trends Study Commission in 2009: Given the high volatility built into Minnesota’s revenue stream, a larger reserve is in order.

The commission recommended $2.1 billion, with regular adjustments for inflation. Minnesota’s $1 billion reserve total has not been altered since the mid-1980s.

State revenues drop quickly when economic trouble comes. If that should happen near the end of a biennium, adequate reserve funds are crucial to meeting the state Constitution’s requirement that the budget period must end in the black.

Without sufficient reserves, lawmakers would have few options for satisfying the Constitution. The obvious one: An unscheduled, disruptive delay in school payments. Republicans are risking a return of the very thing they aim to undo.

(The Legislature would have the option to punt in such a crisis and compel the governor to unallot spending. A chance to put Dayton into that politically uncomfortable bind in 2013 may have crossed GOP minds.)

“Nobody is harmed by variability in the budget reserves,” noted Management and Budget Commissioner Jim Schowalter. “But people and organizations are harmed by variability in state payment schedules. Avoiding that is what budget reserves are for.”

Legislators likely won’t hear a lot of rooting for reserves. But they ought to hear from school officials, who have more reason than most Minnesotans to be wary of risky state money maneuvers, even ones purportedly for their benefit.

They should advise legislators to stick with existing law: Get the state back on its feet with a fully funded reserve, and keep schools next in line.

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